Warning: The “Lake Wobegon effect” is the single best summary of today’s stock market psychology, high-frequency trading, behavioral economics theories, and the new science of irrationality … and it’s sucking the life out of America’s soul. Here, listen to more of these arrogant musings surfacing everywhere from deep in our collective brain:

· all Wall Street bankers are worth 100 times any Main Street investor.
· all Corporate American CEOs deserve to make 400 times their workers.
· all children of all Forbes 400 billionaires deserve to inherit tax-free.
· all lobbyists deserve millions when winning billions for special interests.
· all taxpayers should pay for catastrophic mistakes of Wall Street fat-cats.
· all super-rich hedge fund managers deserve to be taxed at capital gains rates.
· all senators deserve to become millionaire lobbyists when they retire.
· and Goldman Sachs CEO Lloyd Blankfein deserves a $100 million bonus.

Yes folks, this is America’s collective brain buzzing along at hyper-speed. This is the toxic irrationality driving America in the 21st Century … and it really is destroying our soul from within. Seriously, look outside the isolation bubble you live in. Ask why so many other American brains are on auto-pilot, guided by what Yale psychologist Dr Paul Bloom humorously calls the “Lake Wobegon effect” in his New York Times review of The Invisible Gorilla by psychologists Christopher Chabris and Daniel Simon: The Invisible Gorilla is “one of the most famous psychological demos ever. Subjects are shown a video, about a minute long, of two teams, one in white shirts, the other in black shirts, moving around and passing basketballs to one another. They are asked to count the number of aerial and bounce passes made by the team wearing white, a seemingly simple task.”

Stop. Test yourself before you read on. What does “The Invisible Gorilla” study tell you about the brains of folks gambling in Wall Street’s casinos? Where billions of shares, trillions of dollars, stocks, bonds, derivatives trade daily? What’s “invisible” to you? Stop again. Look closely: Not just in the brains of Main Street’s 95 million investors. We know we’re irrational and easily manipulated. But our leaders too? All our Wall Street CEOs, brokers, high-frequency traders … all our government bureaucrats, policy wonks, congressional committee heads … all our pension fund bosses, mortgage lenders, central banks policy makers … and all the other global players playing games with derivatives in the $670 trillion unregulated global shadow banking casino that’s avoiding real reform?

The investor’s brain is a very bad “computer”
Years ago America’s leading behavioral economist, Richard Thaler warned: “Think of the human brain as a personal computer with a very slow processor and a memory system that is small and unreliable … the PC I carry between my ears has more disk failures than I care to think about.” And it ages badly. Factor the “Lake Wobegon effect” and the “Invisible Gorilla” into your computer. What do they tell you about the impact of billions of irrational decisions made by all gamblers betting at Wall Street’s 24/7 global casino?

Here’s four irrational clues: Remember, (1) between 2000 and 2010 Wall Street lost 20% of your retirement playing the stock market … (2) Still Wall Street pocketed hundreds of billions for themselves … (3) Still those fat-cats off-loaded trillions of debt on taxpayers when in defacto bankruptcy in 2008 … and (4) yet our brains let them get away with it.

The conclusion are obvious: The average investor’s brain is so irrational it is totally inadequate as a tool in evaluating market trends, cycles and patterns, in picking stocks, and in judging the value of so-called expert advice we get from self-interested bankers, advisers and cable pundits … and yet, paradoxically, like alcoholics, coke addicts and gamblers, we cannot stop. Crazy but true. Listen as Dr. Bloom continues: “Halfway through the video, a woman wearing a full-body gorilla suit walks slowly to the middle of the screen, pounds her chest, and then walks out of the frame. If you are just watching the video, it’s the most obvious thing in the world. But when asked to count the passes, about half the people miss it.” (Translation: Same happens when you’re “counting passes” in the stock market, you “miss” not only the “obvious” but the secret stuff Wall Street’s “Invisible Gorillas” are purposely hiding.)

Only half? No, my friends, it’s far worse. In Bloom’s own studies “63 percent of Americans consider themselves more intelligent than the average American, a statistical impossibility. In a different survey, 70 percent of Canadians said they considered themselves smarter than the average Canadian.” But when it comes to financial markets, its closer to 100%, for both little “gamblers” and the big “casino owners.”

Wall Street’s “Invisible Gorillas” really are stealing America blind
Want more proof? Remember the studies by University of California behavioral finance professors, Odean and Barber: They researched the trading behavior of 65,000 American investors. Also all investors trading on the Taiwan Stock Exchange. Their conclusion: “The more you trade the less you earn.” 77% of Americans were losers. 82% of Chinese investors were losers. And still: Their brains are so irrational, so addicted, they can’t stop, just keep going back. Yes, investors are stuck with addictive “Loser Brains.” Even confronted with the facts investors continue in denial, victims of the “Lake Wobegon effect,” refusing to learn the lessons of the “Invisible Gorilla.” Bloom concludes: “When you direct your mental spotlight to the basketball passes, it leaves the rest of the world in darkness … Even when you are looking straight at the gorilla (and other experiments find that people who miss it often have their eyes fully on it) you frequently don’t see it, because it’s not what you’re looking for.”

Get it? Your brain is wired to make bad decisions. Wired to make them over and over. Wired to miss crucial data. And this has a cumulative and collective effect that drives markets to the edge of a precipice with such powerful momentum that we’re blinded by euphoria, never see the Invisible Gorilla, the Black Swan, the WMD … never see the risks until it’s too late, a catastrophe happens and the invisible becomes painfully visible, tragically blowing up in our faces. Sound familiar, it did happen in 2008 forcing former Fed Chairman Alan Greenspan to admit to a congressional committee: “I found a flaw … I made a mistake.” Actually Mr. Greenspan you were a miserable maestro. For 18 years the mistakes your irrational brain made blinded you to an invisible “Reaganomics Gorilla” what’s still destroying America.

Treasury Secretary Paulson was even worse. Later reluctantly admitted he should “have seen the sub-prime crisis coming earlier.” But it turns out he’s a liar and con man. Yes, later Bloomberg News reported Paulson not only saw the “Invisible Gorilla,” he warned Bush’s staff at Camp David in 2006, two years before the meltdown. But then the “Lake Wobegon effect” kicked in, our leaders all ignored the warnings until the 2008 crash.

Wall Street has no soul, is drowning America in ‘Lake Wobegon’
Yes folks, the “Lake Wobegon effect” and the “Invisible Gorilla” tell us all we need to know about behavioral economics in America today. The irrational brains of our leaders are so self-destructive they let bubbles blow and blow … they will always fail to act early enough … they are trapped in their greedy brains in denial … trapped in their narrow ideologies … trapped, making endless stupid decisions … ignoring the obvious … they will let risks become increasing more deadly till minor pops becomes collosal WMD-category meltdowns, crashes, collapses of epic catastrophic proportions, worse than the estimated $23.7 trillion aftermath of the 2008 meltdown … and another is dead ahead.

Yes, tragically many more are coming because Wall Street is morally dead, it has no conscience, no soul, no ethics, no moral values other than getting as rich as possible, as fast as possible. Tragically, Wall Street is now the “Invisible Hand” of “Capitalism 4.0.” Tragically, Wall Street’s believes the best economy is an unregulated free-market system where the collective greed of the biggest players best serves the public good.

Yes, tragically for future generations of Americans, the guidance system of capitalism’s “Invisible Hand” has been replaced by guiding hand of Wall Street: With no public conscience, no soul, no ethics, no moral values, nothing other than the addict’s obsession to get as rich as possible, fast as possible. And tragically, Main Street America is trapped with them in the “Lake Wobegon effect.” Tragically, the “Invisible Gorilla” will strike again, soon, and again, and again exploding into visibility … until our rude awakening.

original: MarketWatch 6.22.10

The “Goldman Conspiracy” is the perfect B-School case study of Wall Street’s secret contagious pathology, with insiders like Blankfein, Paulson and others pocketing billions more of the firm’s profits than shareholders, evidence the new “mutant capitalism” has replaced Adam Smith’s 1776 version which historically endowed the soul of American democracy as well as our capitalistic system. But sadly for America, Goldman’s disease is rapidly becoming a pandemic spreading beyond Wall Street’s “too-greedy-to-fail” banks, infecting our economy, markets and government, as it metastasizes globally.

What are the symptoms of this growing “soul-sickness,” this “pathological mutation of capitalism” Bogle fears? Recently we reviewed the consequences of this “soul-sickness.” Today we’ll edit and paraphrase news reports about fifteen symptoms spreading “soul-sickness” beyond the boundaries of this Goldman case study: These are the 15 signs of a moral pathology undermining not just banking, but American democracy and capitalism.

1. Gross denial of any moral damage caused by their rampant greed
Seeking Alpha: ‘Goldman is America’s most hated corporation. We cheer as Rolling Stone’s Matt Taibbi calls Goldman “a giant vampire squid wrapped around the face of humanity.” Banks triggered a global crisis. Main Street suffers. Greedy bank CEOs raid the Treasury then stuff $30 billion in their bonus pockets, up 60% from last year.’ They are our 21st century General Motors, convinced ‘What’s good for Goldman is good for America.’ We saw how that arrogance ended. Wall Street has similar suicidal symptoms.

2. Narcissistic egomaniacs with secret “God complexes”
London Times’ John Arlidge interviewed Goldman CEO Blankfein: ‘He paid himself $68m in 2007, now worth more than $500 million, yet insists he’s a blue-collar guy. He says banking has a ‘social purpose,’ just a banker ‘doing God’s work’.’ When I was at Morgan Stanley in the seventies the firm ran an ad: “If God Wanted To Do a Financing, He Would Call Morgan Stanley.” Today, all of Wall Street is dual diagnosed: They’re morally blind money addicts who believe they’re “God’s chosen.” AA would say: They haven’t “bottomed,” won’t recover from their disease till a disaster hits, with another market meltdown and the “Great Depression 2.” Then maybe they’ll “quit playing God.”

3. Paranoid obsessives about secrecy, guilt and non-disclosure
Bloomberg: “New York Fed’s Secret Deal: Taxpayers paid $13 billion more than necessary when government officials, acting in secret, made deals with banks on AIG, buying $62 billion of credit-default swaps from AIG. The government would eventually cover about $180 billion in AIG swaps backing toxic CDOs when Paulson and Bernanke double-teamed to bailout Goldman, saving them from bankruptcy.

4. Power-hungry need to control government using “Trojan Horses”
Wall Street Journal: ‘For a year Goldman said it wouldn’t have suffered damage if AIG collapsed. But a new report throws kills that claim. TARP inspector general found that then New York Fed Chair Geithner gave away the farm. If AIG had collapsed, Goldman would have had to cover the losses itself. They couldn’t collect on the protection of AIG swaps.’ Yes, Goldman was bankrupt. But ‘friends in high places’ always save them.

5. Borderline personalities who regularly ignore “conflicts of interest”
New York Times: ‘Before becoming Treasury secretary in 2006, Hank Paulson agreed to hold himself to a higher ethical standard than his predecessors. He specifically said he’d avoid his old buddies at Goldman where he was CEO. Later Congress saw many conflicts of interest, not just meetings but favorable treatment for his buddies at Goldman.’

6. Pathological liars incapable of honesty even with own investors
McClatchy News: “Goldman secretly bet on the U.S. housing crash after peddling more than $40 billion securities backed by 200,000 risky home mortgages. But they never told their investors they were also secretly betting that a drop in housing prices could wipe out the value of those securities.’ Paulson knew, stayed silent. ‘Only later their investors discover Goldman’s triple-A investments were junk. Did Goldman’s failure to disclose its bets on an imminent housing crash violated securities laws?’ BU Professor Kotlikoff says: This is fraud, should be prosecuted.’ But won’t in the new “mutant capitalism.”

Members of AA know when an alcoholic is lying: Their lips are moving! Same with Wall Street: Think Liar’s Poker. It’s in their DNA. They’re compulsive liars trapped in a culture of secrecy. They lie, the lies cascade, memory slips, more lies are necessary, they cannot stop lying. Goldman sure can’t … look, their lips are moving again.

7. Sole fiduciary duty to insiders, not investors, never the public
NY Examiner: ‘Goldman was at the heart of the sub-prime market, selling sub-prime junk as no-risk AAA bonds, then gambling, hedging, shorting their investors. Goldman traded like Enron. That set up the meltdown. The Fed and Goldman’s ex-CEO at Treasury saved Goldman. Taxpayers got stuck with the bill. McClatchy’s Gordon uncovered Moody’s making billions selling triple-A ratings. Bailout overseer Elizabeth Warren called this reckless gambling. Trend forecaster Gerald Celente calls it mafia-style looting.’

8. Moral issues are PR glitches, violations of “don’t get caught” rule
USAToday says ‘Goldman Sachs should be celebrating. Yet, the mood at the investment bank seems to be one of crisis about the public backlash over employees’ bonuses. So Goldman’s on a PR blitz in a bid to undo the damage. They canceled their Christmas party. Also launched a $500 million program for small businesses. Get it? They can’t see their moral failings, only a PR problem, so they hire PR agents and crisis managers first.

9. Charitable donations are tax and PR opportunities, not moral issues
New York Times: Examined Goldman charitable foundation’s tax filing: ‘Thick as a phone book with more than 200 pages of trades. ‘Never seen anything like it,” said Verne Sedlacek, president of Commonfund, a $25 billion fund for universities and nonprofits. The money to Goldman’s foundation is dwarfed by insiders’ bonuses. The foundation got $400 million, gave away $22 million.’ Bonuses were 20 times more. Even the New York Post said ‘Goldman’s Born Again Image is Laughable.” They’re sleaze-ball cheapskates.

10. When exposed in a massive fraud, feign humility, fake an apology
CBS MoneyWatch: ‘Blankfein says he’s “sorry for the role Goldman played in the housing crisis: We participated in things that were clearly wrong.” “Wrong?” Sounds more like he’s admitting to something “clearly criminal.” Reread: Isn’t he admitting guilt to a fraud; cheating millions of homeowners, shareholders, taxpayers? Then laughs at us with phony “restitution,” a fund of $100 million annually for five years to small business owners.’ Financial Times says ‘$100 million is the profits from one good trading day. In 3Q’09 they had 36 days better than that.’ Unfortunately, these crooks will get away it.

11. When bankruptcy threatens, bribe friends in “Happy Conspiracy”
Barron’s: While Geithner was ‘showcasing what a great investment Washington made in Goldman the 23% return on the $5 billion of the taxpayers money. Buffett’s deal made him a fabulous 120% return. Goldman’s stock ran up to $180 from $115, a gain of $2.8 billion. Add 8% discount on warrants, another $3.2 billion to him.”

12. Engage co-conspirators to cover-up, distract, do your dirty work
Reuters: ‘Former Merrill Lynch CEO John Thain was fired after a scandal over the billions Merrill bonuses. He says big insider bonuses don’t cause excessive risk-taking nor the financial crisis.’ He blames ‘poor risk management, excessive leverage and too much liquidity for too long. But even if they tie bonuses to long-term performance, that won’t prevent the next collapse.’ Why? They’ll find new ways to break the moral code.

13. As money-hungry vultures, they will prey on vulnerable Americans
McClatchy News: ‘An obscure Goldman subsidiary spent years buying hundreds of thousands of subprime mortgages, many from the more unsavory lenders. They repackaged them as high-yield bonds. The bottom fell out. Now, after years of refusing to disclose they owned the mortgages, the secret is out and Goldman has become one of America’s biggest, greediest foreclosers.’ Yes, the vampire squid wants pounds-of-flesh.

14. Treat everyone not in the “Happy Conspiracy” with “tough love”
HuffPost’s Leo Leopold warns: ‘Each day reveals how we’ve traded away our sense of decency and the common good in exchange for pure greed. Unemployment means hunger. The Agriculture Department reports 49 million Americans don’t have enough food, up 13 million over the last year, highest number ever.’ Wall Street treats anyone not in the “Happy Conspiracy” as morally-defective capitalists in need of “tough love.”

15. Addicts blinded by greed: “Jesus would throw them out …”
New York Times’ Maureen Dowd: “Goldman’s trickle-down catechism isn’t working. We have two economies. In the past decade Wall Street’s shared little with society. Their culture is totally money-obsessed. There’s always room for a bigger house, bigger boat. If not, you’re falling behind. It’s an addiction. And Washington’s done little to quell it. Geithner coddles wanton bankers. Obama’s absent. Saturday Night Live was tougher. And as far as doing God’s work: The bankers who took taxpayer money, pocketing obscene bonuses: They’re the same greedy moneylenders Jesus threw out of the temple.” Pray for the second coming?

Question. Warning: Washington, Main Street, none of us has “clean hands.” We’re all in bed with the “Happy Conspiracy,” touched by greed, turning a blind eye to Wall Street’s rapidly metasticizing moral and spiritual pathology: So ask yourself, do you believe America’s widespread “lack of a moral compass” will eventually trigger another, bigger market and economic meltdown, pushing America into the next “Great Depression II?”

original MarketWatch 11’09

No, it’s not very complimentary, but it is true: Terry Burnham, a former Goldman Sachs trader calls it a “lizard” brain. Clotaire Rapaille, a French neuro-marketing guru generalizes, it’s your “reptilian” brain. And up at Harvard there’s a wiseguy professor who refers to the investor’s primary decision-making tool in even less flattering terms: “Rat” brain!

Lizard? Rat? Reptilian? Get a grip guys, you sound more like some mean-spirited politicians than members of the world’s elite institutions and academies. But we get the point. You’re talking about our primitive brain, which research consistently proves is a very bad tool for making investment decisions … and yet, like addicts, we can’t stop the insanity, we keep using a flawed tool. Yes, you heard right: Your brain is handicapped, your brain is a saboteur costing you big money. In Mean Markets & Lizard Brains, former Goldman trader Terry Burnham says our primitive brain was designed to help our ancestors hunt for food, daily survival stuff.

But “by its very nature, investing requires us to be forward looking, to anticipate events. Our lizard brains, however, are designed to look backward. Thus, the lizard brain causes us to be optimistic at market peaks (after rises) and to be pessimistic at market bottoms (after falls).” So whether it’s optimism or pessimism, greed or fear, your emotions do your investing, not reasoning and logic—and you can’t trust them.

Harvard gambles with Wall Street’s “rat” brains

And it’s not just you. The best and the brightest are also trapped by this saboteur, their primitive brains. There was a great article in SmartMoney magazine, “Outsmarting Your Brain:” Harvard Business School professor Max Bazerman was speaking to a conference of 75 Wall Street power-players, guys commanding six-to-seven figure incomes for managing your money.

Max opened by auctioning off a $100 bill. Simple rules: The highest bidder gets the $100 bill. And the second highest pays what he bid, but gets nothing. Forty hands quickly pushed the bidding to $95. Then a couple presumably rational hot-shots, an institutional money manager and a pension-fund trustee, broke the $100 barrier, after which both were guaranteed losers.

Imagine the insanity: Two of America’s financial geniuses caught up in a hotly contested duel, pushing the bids up, up, up … to $465!

That’s right, the winner bid $465—for a $100 bill!

The best and the brightest have lizard brains too

If you’ve ever doubted that investors are controlled by an irrational rat brain, the professor adds this scary observation: “I’ve played this game perhaps 600 times, and I’ve never seen the bidding stop below $100.” Yikes! It turns out that the best-and-brightest managing the $10 trillion mutual fund industry are just as irrational as the rest of America’s 95 million average folks who trust them with their money. The blind are leading the blind. We are all playing the stock market game like rats and lizards chasing around in a maze for cheese … while telling ourselves we’re rational.

Get it? Our brain is our worst enemy. When it comes to investing, we still make decisions using a self-sabotaging primitive brain. Here’s Burnham’s summary: “We need to precisely restrain our instincts in order to make money. Unlike neural games of chance, or ancestral problems like gathering and hunting, financial success means suppressing out ‘gut’ instincts.” Here are his eight rules to restrain this saboteur.

One. “Don’t Trade Emotionally, Unless You’re Tom Cruise”
Actually, he’s referring to Cruise’s role as “Maverick” the jet fighter pilot in the film, Top Gun. Movies keep our myths alive. In fantasies we cheer the superiority of our gut instincts as the hero shoots down enemy fighter jets, winning a great battle in the final scenes. But c’mon folks, get real, it’s just a movie. In real life Tom is just little irrational Tommy jumping on Oprah’s couch. So when you’re investing on Wall Street’s couch: “Trade as little as possible.”
Two. “Never Trust Anyone, Not Even Yourself”
The rest of Burnham’s warnings emphasize this “new science of irrationality.” You should never trade impulsively on tips, from your barber, from your best friend, your broker—and especially not on tips from your lizard brain: “Always include a significant delay between an investment idea and an actual trade.
Three. “Losers Average Losers”
Remember: “Even great and experienced traders must fight the impulse to hang onto and average into losers.” Get out. Stop playing macho-man. The lizard brain hates losing, so it wants to hangs on, and on, and loses (again).
Four. “Do Not Dollar Cost Average”
This rule applies to trading individual stocks. Less so when adding to a diversified portfolio as part of a regular savings program. But he warns traders to listen closely: “While dollar-cost averaging works in bull markets, it is not profitable in long-term declines.”
Five. “Do Not Open Your Mutual Fund Statements”
Actually Terry’s talking about ignoring all news, including cable TV. By the time you get any “breaking news,” it’s too late, there’s no trading value. Wall Street insiders had it and acted on it long before it became “news” and you see it. Worse yet, your lizard-rat brain will make the mistake of reading something into random news, compounding your mistakes.
Six. “Spin Control for Yourself”
Lizards and rats hate to lose. But since they can’t focus on the big picture or on the future, they are destined to lose anyway. They’re accident-prone when it comes to investing. Solution: Focus on your portfolio as a whole, and stop tinkering with it.
Seven. “When to Go ‘All In’ ”
Remember “The Gambler” song, by Kenny Rogers: “You gotta know when to hold’em, when to fold’em.” You also gotta know when to go “all in” (bet everything). Which is rarely. But the hyperactive rat-lizard brain still does it. Unfortunately, when you’re in the Wall Street casino, fighting to survive against thousands of professional rats, lizards and other hostile animals who are trying heard to pick the meat off your bones all day, every day … well, maybe you ought not even be in that casino.
Eight. “Do Not Get The Key To The Minibar”
In short, cheap discount trades make irrational trading too easy, like hotel minibar keys that make it easy to spend $10 for a mini-package of cashews. So “those who trade too much should arrange their finances so that impulsive trades are not possible. Remove temptation: do not expect to resist it.”

Solution: Terry puts the bulk of his family’s assets with a full-service broker who charges a whopping $100 a trade. Here’s my solution. Stop trading altogether, stop rebalancing … turn off your primitive brain by building a passive, well-diversified portfolio of no-load index funds. Either way works.

But as soon as I say that, my psychic brain hears all the rat-lizard brains out there conspiring to chew the wiring in my computer, then go hunting for their next meal at the Wall Street casino. Their primitive brains are convinced that with the right tips they’ll go “all-in” and finally beat The Street’s best-and-the-brightest rodents and reptiles. So they tune me out, convinced I couldn’t possible understand their unique brand of instinctual “Maverick” genius as a trader. So they’ll continue jumping up and down on Oprah’s couch like an irrational child (metaphorically, of course), proving again and again that the investor’s primitive brain really is a saboteur.

FirstPubDate: Aug’06